A warning on Germany's financial health from ratings agency Moody's added to investor nervousness, while Spain also edged closer to a full-blown bail-out as its borrowing costs soared.
The Footsie closed 34.6 points lower at 5499.2 following a 2% plunge on Monday, which wiped £30 billion from its value amid concerns over Spain and Greece.
The single currency eurozone region came under increased pressure after the yield on 10-year Spanish bonds hit euro-era highs of 7.6% as it became increasingly likely the country would need an EU bailout.
Moody's said a Spanish bailout would put more pressure on Germany, leading it to lower its outlook on the European powerhouse's credit rating to negative from stable.
Against a weakened euro, the pound rose to €1.29. Sterling was up against the dollar, at 1.55.
On the Footsie, miners and financial stocks suffered amid the ongoing weak sentiment and following reports that banks would reveal additional charges for mis-selling payment protection insurance (PPI).
The total hit from PPI claims for the industry is expected to be close to £8bn once the half-year reporting season comes to a close, starting with Lloyds Banking Group on Thursday.
Royal Bank of Scotland was 1.3p lower at 196.6p, while Lloyds dropped 0.5p to 28.8p.
Insurers also suffered, with Aviva falling 5.4p to 269.8p and Admiral losing 21p to 1129p.
Chemical manufacturer Croda International shot to the top of the FTSE 100 Index after it revealed a 6% increase in profits in the first half of the year. Shares rose 135p to 2364p.
Outside the top flight, Carpetright saw shares slide despite an encouraging growth in UK sales. But this was offset by lower sales in the Netherlands, Belgium and Ireland. Shares fell 2.5p to 612.5p.
Set-top box manufacturer Pace saw its shares jump after it allayed fears over supply disruption caused by floods in Thailand. The West Yorkshire-based firm, which supplies boxes to BT, BSkyB, and Virgin Media, said the hit to final results was forecast to be at the lower end of previous guidance. Shares were 19.5p ahead at 134p.
The biggest Footsie fallers were Glencore International down 7.2p at 301.7p, ITV off 1.6p to 70.4p, International Consolidated Airlines Group down 3.2p to 145.4p and Resolution down 4.4p to 205p.
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